Europe in 13 months

Debt crisis requires hard decisions — now

European Central Bank President Mario Draghi stands in front of the cupola of the Bundestag on October 24, 2012 in Berlin. (JOHANNES EISELE)

European leaders talk and talk, but they can't change the most important facts about the debt crisis that has put much of the continent into an economic tailspin:

It will take loads of rescue money to pay down huge government debts and recapitalize tapped-out banks.

But nothing is free: Getting that rescue money will require loads of austerity. The upshot, unfortunately, is dithering and delay. Time's-a-wasting, Europe. Make the tough decisions.

To date, Europe has made halting progress. The most recent milestone came in September, when the European Central Bank announced a bond-buying program intended to shore up the debt-strapped economies of Spain and Italy. Then progress slowed. The necessary step of creating a single eurozone banking supervisor has bogged down in details.

Meantime, Spain is under pressure to tap the ECB's bond-buying program. But its leaders have resisted a bailout because of the added austerity measures that come with the aid. Greece too is resisting. It wants its European neighbors to stipulate that the austerity it has adopted so far is sufficient to justify additional aid. The next 30-billion-plus installment of a 130-billion-euro bailout deal reached in March is being held up because Greece still has way too much debt. Without the money, the Aegean nation runs out of cash reserves in mid-November.

Austerity is unpopular, and it's no wonder leaders of Spain and Greece are anxious to avoid more. Imposing budget cuts and tax hikes in exchange for bailouts inevitably creates hardship for everyday people. Even officials of the International Monetary Fund, past champion of austerity programs, recently acknowledged the severe impact of conditions forced on South Korea, Argentina and other nations that sought debt relief in the past.

For a deeply indebted nation to start living within its means, however, there is no substitute for austerity. Consider Cyprus. This small Mediterranean island nation is known for its ancient ruins — and, increasingly, its new ones.

Its real-estate market went bust after a debt-fueled expansion. Unfinished housing and commercial projects dot the island like fallen temples. Its main banks have fallen too. They're riddled with bad real-estate loans and the marked-down sovereign debt of neighboring Greece.

Earlier this year, Cyprus sought financial aid from the so-called Troika — the ECB, IMF and European Commission. The closer the Troika looked, the worse Cyprus turned out to be. The bill for a rescue of its financial sector went from relatively modest preliminary estimates to upward of 15 billion euros. For a country with 850,000 inhabitants, that's a lot of euros. The Troika also recognized the need for fiscal austerity. The public payroll has ballooned over the past decade. Its average wages far outpace those in the private sector. Labor-market rules are rigid. The public workforce is entrenched. The Troika reportedly urged Cyprus to cut the government payroll by 15 percent, shave 10 percent off welfare benefits and roll back government housing subsidies. Cost-of-living allowances and other automatic pay raises need to go. So does the 13th month of pay.

Thirteenth month? That's right.

In Cyprus, public workers typically receive an extra month's salary as a year-end bonus. The idea is to compensate for the fact that if a month covers four weeks, then 12 months equals just 48 weeks. By that calculation, the final four weeks of a 52-week year would go uncompensated if not for the 13th month of pay.

Such thinking isn't unique to Cyprus. In parts of Asia and Latin America, the 13th month of pay is expected. The issue is that in Cyprus, as in the rest of southern Europe, something's got to give. The money is not there to meet all the promises and entitlements.

Sound familiar? At least America still has time to reform. Cyprus does not.

Nevertheless, Cyprus President Demetris Christofias was incredulous at the prospect of his fellow Cypriots losing their 13th month in exchange for a bailout. "You cannot tell someone they won't receive a 13th salary," he told a Greek state broadcaster. The same goes for cost-of-living allowances, he said. Untouchable. Cyprus reportedly wants to take longer to implement austerity and cut much less than the Troika prescribes.

Change is hard. A reckoning is inevitable. The overspending has to stop. A bailout is necessary to keep Cyprus from defaulting on its debts and leaving the euro currency zone, which would destroy what's left of the Cypriot economy. If it keeps the 13th month, it will have to cut elsewhere all the more.

The same goes for other debt-strapped European nations. Instead of stalling and postponing, better to embrace the necessary changes now. It is the only way for Europe to put its finances back on a sustainable foundation, and for the Eurozone to survive the crisis intact, reinforced and better-integrated.